Little Rock II

 Let me summarize in four words:  economy calm, market nervous.

     I’m not going to say a great deal about the economy.  We are experiencing disinflation as a result of a significant and suffocating overhang of national and international debt.  Our own federal deficit is financed to the extent of approximately 60% by foreign buyers of our bonds.  We are enjoying relatively low interest rates and a ready money supply, or to put it another way, we are enjoying easy money.  The likely scenario is that a correction of our dire and threatening trade imbalance with the rest of the world will only obtain if there is a recession  in the United States or a boom in those countries with which we trade.  What often happens in a period of low interest rates and an open handed money supply is that the expansionary funds go into financial instruments, into essentially nonproductive investments, moving the money around among investors into takeovers, leveraged buy-outs, and the like.  This phenomenon can make it difficult to stimulate our economy via monetary policy.

     But I said I wasn’t going to speak at any length about the economy.  Our own economy is calm at the moment, it is the clouds overhead which are threatening and extensive.

     Now to the equities markets.  Equities, as most of you know, provide a unique investment vehicle.  They have offered significant returns over the long-term and an opportunity to keep abreast of inflationary trends.  Over several market cycles, not necessarily in any one year, the income stream which can be generated can be expected to be greater from a fund invested substantially in stocks than a fund predominantly in bonds or cash equivalents.  It seems to be the general wisdom, therefore to have a substantial position in equities in a fund with objectives which are longer rather than shorter term.

     I characterized the market as nervous, however.  The US equity market is in the 58th month of a bull market which is substantially longer than any of the last 10 bull markets.  The price rise - up over 175% - has outstripped that of any of the last 10 bull markets.  Only the market of 1924 to 1928 - up over 250% - has had a greater rise.  The S&P 425 Industrials Price/Earnings ratio is near an all time high.   The S&P 425 Price/Book Ratio was higher only in 1929 and the S&P 425 Yield has been equaled in only one quarter since 1929.

     Could this mean that what goes up must come down with a vengeance?  One commentator, an advisor to our Investment Committee, has said, ”There is the potential for a downturn that has the possibility of a magnitude of once in a generation, or even perhaps of once in a lifetime.”  Unfortunately, he goes on to say, “Neither we nor anyone else we know can predict if the downturn will come in the next quarter or the next year, or whether indeed it will come at all.  If we could predict the move, we would know exactly what asset allocation steps should be taken.”

     Perhaps the question is theological and not financial.  I know if I could predict that sort of thing with any consistency, my followers would be full of faith and fervor.  Alas it is not to be.  There is reason however, to believe in the possibility of a downturn within the next year or so.

     This does not mean the UUA or any of you should rush to get out of equities.  It does mean increasing allocations to alternative investments and/or to cash equivalents and watching individual issues more carefully.

     Market timing is a difficult to impossible discipline in which to succeed.  One must be right about the time to sell and also about the time to buy back in.  The market is perverse - it is best to compromise.  The risk of being out of the market entirely at the time of an upward movement is too great to take.  The uncertainties of walking that wire are great, as great as life.